Strategic commodity group management enables the optimization of procurement costs, supply chain strategies and supplier relationships. In addition, the classification of commodity groups also supports the assessment of risks as required by the Supply Chain Act which comes into force in January 2023. We explain how companies can take advantage of the many benefits of strategic commodity group management.
What is strategic commodity group management?
If products in a company’s procurement portfolio have common characteristics, they can be bundled into groups and certain criteria taken into account in procurement. In strategic purchasing, this process enables the systematic identification and further development of optimization potential with regard to the purchase price, various procurement risks or cooperation with suppliers and increasing supply chain resilience.
What are the advantages of commodity group management?
For which supplied parts, components and products does it make sense to diversify procurement? In which cases should the company rather focus on strategic supplier development? In what context is it important to strengthen partnerships and jointly develop new technologies or products? And: In which scenarios is an increase of stocking a favorable option? The structured classification of the commodity groups can help answering these questions and thus pave the way for a purposeful procurement strategy.
Alas, systematic commodity group management is also helpful with regard to the risk assessment of individual products and the associated suppliers. For example, the Supply Chain Act will require comprehensive risk analysis and ongoing risk management from 2023. The more detailed and consistent companies are in identifying the risks of individual products or commodity groups across the entire value chain, the easier it is to meet the requirements.
The key advantages of commodity group management include:
- Improved cost control and efficiency
- Comprehensive transparency across the entire network (goods, materials, services)
- Focus on holistic process optimization
- Increased resilience through appropriate diversification or supplier development
- Optimized product range structure and thus higher customer satisfaction
- Better risk assessment, for example, with regard to ESG criteria analyzed according to specific aspects (cultivation, packaging, logistics)
- Reduction of procurement risks
The commodity groups can be classified as follows:
Commodity groups, type A: Cooperation and joint development count
Product groups in this category comprise complex articles and goods with a high impact on corporate objectives. They can often only be procured from one or a few selected suppliers and therefore entail a high supply risk. On the one hand, this leads to – mutual – dependency, but on the other hand it opens up opportunities for joint growth. Partnership-based cooperation is a decisive factor in generating benefits on both sides. In this product group, it is advisable to focus on strategic supplier development and good supplier integration. One goal can be the joint development of products, cooperative increase of process efficiency and organizational as well as technological collaboration.
Commodity groups, type B: High negotiating scope due to competition
This segment includes most large-volume indirect commodity groups and interchangeable standard products. While goods in this category also have a decisive influence on the success of the company, they are characterized by a lower supply risk and increased negotiating leeway, as there are usually sufficient alternative suppliers for these commodity groups. In this context, it is worth taking advantage of the strong competition among suppliers to obtain the best price. In this group, it can likewise make sense to establish sustainable strategic partnerships with selected suppliers.
Commodity groups, type C: Maximum efficiency and automated procurement
Goods in this segment are characterized by a high degree of standardization and low impact on the success of the company. Goals for purchasing increasingly include the securing of inventory and the highest possible process efficiency in procurement. Next to Rapid Sourcing methods, Self Sourcing Tools are recommended. With small resources expenditure, minimum requirements are to be fulfilled regarding price, availability and quality. The efficiency in the procurement process is in the foreground of the optimization.
Commodity groups, type D: Increased stockpiling reduces risks
Due to their low-cost structure, these materials and goods have a moderate impact on the corporate results. At the same time, though, they generate higher dependencies on specialized suppliers due to special specifications and criteria. This increases the risk in terms of security of supply. Examples from practice include very low-cost but specialized parts or components, low and favorable quantities of a prescribed ingredient, or raw materials influenced by seasonal conditions. In this commodity group, for example, increased stockpiling can help to reduce the negative effects of dependencies and counteract possible supply risks.
How can companies use the classification by commodity groups?
Once the classification has been made according to need, risk potential and goals, the future strategy can be developed depending on the commodity group – for type A commodity groups, for example, this entails expanding the partnership or increasing the degree of collaboration. Perhaps a change of supplier is also an option – for example, if the current main supplier does not meet ESG standards, the readiness for digitization is faltering, or joint development is inhibited for other reasons.
With a commodity group type B, the enterprise may now see the necessity to turn to different suppliers depending on price criteria and/or consider the distribution of procurement tasks on different suppliers.
The same applies if, due to excessive dependency, the risks in the supply chain increase to such an extent that supply is no longer guaranteed. In this case, it is advantageous to use a procurement market analysis and subsequently identify new suppliers in order to increase the diversity of the network in the corresponding commodity group – and thus increase the resilience of the supply chain.